The following is an excerpt from this working paper regarding the conclusion. For the whole paper please click here.
Conclusions
We employ pooled OLS regression, a fixed effect panel data model, and a panel FGLS estimation method to quantify the possible impact of ethanol on regular gasoline in the U.S. as a whole and in five regions of the U.S. The models control for gasoline imports, refinery capacity, capacity utilization rate, hurricanes, market concentration in the refinery industry, stocks, and seasonality.
Estimation results show that over the period 1995 to 2007, ethanol production had a significant negative effect of $0.29 to $0.40 per gallon on retail gasoline prices. The results suggest that this reduction in gasoline prices came at the expense of refiners’ profits. These results are statistically significant across a range of model specifications and across all regions.
Results for individual U.S. regions indicate that the largest impact of ethanol on gasoline is found in the Midwest region where gasoline prices were reduced by 39.5¢ per gallon. The Gulf Coast region is found to have experienced a 24.6¢ reduction in the retail gasoline price, while for the West Coast and East Coast, the average price drop is about 23.3¢. The smallest impact, a 17.1¢ reduction, is found in the Rocky Mountain region, mainly because of its comparatively low gasoline consumption.
These reductions in retail gasoline prices are surprisingly large, especially when one considers that they are calculated at their mean values over the sample period. The availability of ethanol essentially increased the “capacity” of the U.S. refinery industry and in so doing prevented some of the dramatic price increases often associated with an industry operating at close to capacity. Because these results are based on capacity, it would be wrong to extrapolate the results to today’s markets. Had we not had ethanol, it seems likely that the crude oil refining industry would be slightly larger today than it actually is, and in the absence of this additional crude oil refining capacity the impact of eliminating ethanol would be extreme. In addition, the impact of the first billion gallons of ethanol on this capacity constraint would intuitively be greater than the billions of gallons that came later. We did try a quadratic term to pick up this effect, and it was not significant.
K. Rice
6/2/2008